Doing business in modern conditions is fraught with many risks and investments. But there is a way to reduce risk, reduce investment and time for the so-called promotion of the company, if you apply franchising. Let's talk about this technology and find out its advantages and disadvantages.
Franchising concept
Many terms used in business are unfamiliar or misleading. Nevertheless, one will have to put up with the elimination of one’s own illiteracy in modern economic names.
So, franchising is a business organization based on an agreement under which the franchisor company (product owner) transfers to the entrepreneur or franchisee company the right to sell the services and product of the franchisor. In other words, the franchisor - the owner of the brand - on a contractual basis transfers the right to use a trademark, technology or other products successfully operating in the market. A franchisee can be a private person or organization buying a product and the right to use the brand on the basis of a concession agreement.
Terms of agreement
The concluded agreement provides for the following provisions:
- The franchisee company is obligated to sell the product using the seller’s name, its trademark, marketing technologies, advertising and support mechanisms, following the business rules established by the copyright holder.
- The franchisor supports the franchisee, providing all the resources necessary for starting work - advertising, material, consulting, and provides maximum discounts on the purchase of goods and equipment. The financial costs of preparing and opening a outlet are entirely the responsibility of the franchisee. Such an agreement is called a franchise and is defined as a ready-made business system that makes it possible to start a company with profit, bypassing the difficult initial start-up phase.
Of course, all this does not happen at no cost. And here the brand buyer’s obligations, which are called lump-sum payments and royalties, come to the fore. Now we will figure out what the cost of the franchise agreement is made up of, what contributions and with what frequency will be required when concluding such an agreement.
Franchise: Lump-sum, royalties and investments
The use of franchising significantly reduces risks and guarantees a quick and successful entry into the market. The franchise has a certain cost, which includes:
- A lump-sum payment paid at a time and confirming the right to use the brand. Its size is set in the terms of the agreement, depending on the degree of popularity of the organization offering the franchise.
- A recurring payment called royalties is paid to the trademark owner. This is a kind of analogue of a lease, the size and frequency of payment of which is also established by the seller.
A novice businessman should remember that, in addition to buying a franchise, he will have investments, including the acquisition of fixed assets (premises, equipment) and working capital. But often part of the lump-sum contribution covers the costs of supporting the opening of a business, staff training, advertising and legal support, as well as assistance in establishing accounting.
Lump sum
Decide on the nature of the lump-sum contribution.This is the most significant payment in the franchise, giving and confirming the right to conduct trading activities under the franchisor’s brand, using its proven technologies and, of course, goods.
At its core, the lump-sum fee is the actual price of the license purchased. The main criterion for its size is the projected economic effect, calculated by the seller. A lump-sum payment is paid once in a single amount. It is possible to use installments, but for a rather short period of time.
Royalty payment: concept and meaning
In addition to a one-time contribution, the franchisee, in accordance with the terms of the franchise, regularly pays the right holder monthly, quarterly or annual payments. This is royalty. This payment is part of the income received by the buyer of the brand in the process of their own trading activities. Its amount may be provided for under the terms of the contract in a fixed amount or as a percentage of gross income.
In order to carry out an effective franchisee activity, royalty payments should not be overestimated, since in such cases the company's profitability is reduced so much that there is no point in buying a franchise. The same criteria apply to the lump-sum fee.
But the unreasonably small size of royalties will not allow the franchisor to effectively manage the network of companies, i.e., the key to the success of franchising is the optimal calculation of the main payments. Therefore, the question of what royalties and a lump-sum payment in franchising can be answered as follows: this is an indicator of the level of profitability from a franchise. Basically, it is the size of the royalties that determines the profitability of this acquisition.
Interaction of the parties
Ideally, each of the parties in franchising pursues its own interests - making a profit, minimizing risks. The franchisee makes a profit in the course of business on the basis of privileges acquired through a franchise, and the franchisor interested in high profitability of the company receives a monthly fee in the form of royalties.
Therefore, bona fide partners interested in each other do not overestimate contributions, setting them on the basis of realistically predicted economic benefits determined by calculation and based on the practice of sales already made. There are many examples of such cooperation in world business.
So, we found out that royalties and lump-sum fees are remuneration of the copyright holder paid by the buyer for services providing the right to use intellectual property.
In the accounting registers of both parties, the conclusion of a commercial concession agreement is reflected in the balance sheets 04 “Intangible assets” and 98 “Deferred income”, for the amounts of periodic payments (royalties and lump-sum payments), accounting entries are made by debiting and crediting account 76 “Debtors and creditors. "
The benefits of franchising as a business technology
Having defined such concepts as a franchise, lump-sum payment and monthly royalties, we list the advantages of using a franchise to establish a business:
- the possibility of opening a knowingly profitable enterprise with maintaining economic and legal independence, bypassing the difficult starting period;
- application of the developed algorithm of the finished business model;
- significant risk reduction;
- minimum advertising and marketing costs.
In modern business, franchising is quite in demand, which proves the effectiveness of its use.
